Amazon vs Hachette: Is publishing finally going the way of music?
The Implications of this Goliath vs Goliath battle for the rest of us
NYMag’s coverage of a recent publishing industry panel at the NYPL finally gets to the crux of why a price negotiation between a retailer and one of its suppliers is of large concern to what appears to be the rest of humanity. Book publishers claim their industry needs to earn structurally higher margins because their industry, due its creative product nature, is inherently riskier.
(Before we jump in to assessment of that claim, full disclosure: I own a small amount of Amazon stock in my personal IRA.)
How the Music Industry Works
From my experience in the music industry, I know how difficult it can be to break creative talent. It is very risky and inefficient. Music companies are basically another form of venture capital. They invest in artists (A&R talent, expenses, marketing, advances) where they lose money on a majority of artists. They make up for it by keeping a large portion of the revenues at the back-end. Artist royalties vary a lot but 20% of revenues is a good number to peg to. Mind you, this can end-up meaning artists still get 50% or more of profits but because of the model, more successful artists often end up getting a lower % of their profits.
Impact of Digital Transition on Record Labels
The typical argument by artists about digital sales is “you should pay me higher royalties because your costs are lower in digital.” The problem is that all costs aren’t lower. Yes, physical production and distribution costs are lower, but most of the costs of a record label (besides royalties) are A&R talent, PR and other fixed overhead. The lower revenues from downloads and now streaming and higher demand for royalties has meant that labels have had to innovate: e.g. cut costs, find other sources of revenue etc.
Analogy to Publishing Industry Woes
Publishing industry has similarly paid royalties to authors that to outsiders would look extremely low. Currently the Big 5 publishers pay about 25% of revenues as royalties. Amazon for electronic self-publishing pays 75% royalties. Amazon also wants to drive the cost of e-books down (customers think e-books should’t cost >$10—we can thank iTunes for our price anchoring). Amazon thinks, probably correctly so, that they drive a lot more eBook revenue if they drive prices down. Of course, lower prices on books means lower revenues for publishers to pay for their fixed costs while authors are simultaneously demanding royalties.
Verdict
Ultimately, one thing is certain, the consumer won in the music industry transition. For the cost of one record 20 years ago, you can now listen all the music in the world for a whole month. This model could ultimately be a win for the music-industry also if subscription takes off on a massive scale, e.g. a la cable.
The publishing industry can yell and scream or they can adapt like the music industry is doing. Because change is inevitable and coming soon. Music industry made a mistake in the past by letting one company take control of an entire channel—i.e. iTunes for downloads. Hopefully, they will not to repeat that mistake in subscription streaming and develop an eco-system of players.
If the Big 5 want to win, they need to work with Amazon to help transition their business model for the future slowly or better yet, leapfrog and think about launching their own subscription streaming book service (granted they need to be careful about cooperation given their recent DOJ issues).
